ERISA 101: Your Best 8 Questions Answered

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

ERISA 101: Your Best 8 Questions Answered

Most of us have gone through the process of obtaining a driver’s license. We read up on the rules of the road, we practiced driving, and when we felt ready we went and took the exam. If we passed, we were issued a driver’s license.

If you are a private-sector employer that offers an employee benefit plan you are also required to comply with “the rules of the road” as it pertains to laws under the Employee Retirement Income Security Act of 1974 (ERISA).

Unlike a driver’s license however, you weren’t required to prove an understanding of the rules before you decided to offer health benefits. There was no handbook issued, no practical exam where you had to demonstrate you could operate an employee benefit plan.

Along comes the Affordable Care Act (ACA) and you find yourself on the road without a solid understanding of the laws. Meanwhile the Department of Labor has called in reinforcements and is sitting like highway patrol, tucked away in the brush at the side of the freeway just waiting to charge you with reckless driving.

If you get caught, you’ll be wishing it WAS a speeding ticket.

A penalty for one of the most frequent violations was recently increased from $1,100 per day to $2,063 per day.

Don’t get caught. Learn the answers to your best 8 questions:

Question 1 – What is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals participating in these plans.

Question 2 – Which employers are governed by ERISA?

Private sector employers that voluntarily establish pension and/or health plans are governed by ERISA. In general, government entities and churches are not governed by ERISA.

Question 3 – What employee benefit plans are governed by ERISA?

ERISA governs all claims for benefits (whether procured through insurance or otherwise) from an “employee welfare benefit plan”.

An employee welfare benefit plan is defined as “any plan, fund, or program . . . established or maintained by an employer or by an employee organization” which provides employee benefits such as life, health or disability.

Question 4 – Does ERISA require employers to offer employee benefits?

No. ERISA does not require an employer to provide employee benefits. However, once an employer decides to provide benefits subject to ERISA, the employer must follow the rules and requirements under ERISA.

Question 5 – What are the main compliance obligations for an employer sponsored ERISA plan?

The main compliance obligations for an employer’s ERISA plans can be categorized as follows:

Documentation

  • A Plan document must exist for each plan
  • A Summary Plan Description (SPD) must be furnished automatically to plan participants
  • A Summary of Material Modification (SMM) must be furnished automatically to plan participants when a plan is amended
  • A document that explains how full time employees are being counted
  • Copies of certain plan documents must be furnished to participants and beneficiaries on written request
  • A Summary Annual Report (SAR), which summarizes Form 5500 information, must be furnished automatically to plan participants for a plan that files a Form 5500 (except totally unfunded welfare plans)

Protocol & Procedures

  • Fiduciary standards must be followed
  • Claim procedures must be established and carefully followed when processing benefit claims and when reviewing appeals of denied claims

DOL Reporting Requirements

  • Form 5500 must be filed annually for each plan (subject to important exemptions, especially for small plans)
  • A Fidelity bond must be purchased to cover every person who handles plan funds (if applicable)

Question 6 – Isn’t the contract issued by the insurance company sufficient?

No. An employer’s insured benefits will be dictated in large part by the insurance contracts under which the benefits are paid. But because insurance companies are not directly subject to ERISA, their contracts will not have all the provisions required of an ERISA plan document.

As an example, imagine an employee comes to you and wants to know how the company handles one of the following scenarios:

  • Which benefits is he allowed to continue during FMLA?
  • Is he required to make contributions before, during, or following his leave?
  • When is an employee entitled to benefits in the case of being rehired?
  • Under what circumstances will an employee’s benefits terminate?
  • What benefits is he entitled to continue under COBRA?
  • How do you handle Qualified Medical Child Support Orders (QMCSO)?

The best and most efficient way to address the documentation requirement of ERISA compliance is through use of a mega-wrap document or umbrella document. Such a document wraps itself around all of your other benefit plan documents to combine them into one legal, binding document.

A WRAP document can satisfy a large component of your documentation requirement and often benefit consultants like myself include it with their services. To view the types of questions asked on a standard Adoption Agreement please click here.

Question 7 – What is the liability for a fiduciary under ERISA?

The DOL has the authority to assess civil penalties for various types of ERISA violations. The 3 most common and costly violations on the rise are:

1. Violation: Form 5500 – for example failure to file one, or filing one that is deemed incomplete

    • Penalty: $1,100 per day for each day an administrator is in violation. Effective august 1, 2016 the penalty was increased to $2,063 per day for violations that occurred after November 2, 2015.

2. Violation: Failing to Respond to participants’ requests for plan information – for example, failure to produce a Summary Plan Description (SPD) within 30 days of the request

    • Penalty: $110 per day for each day administrator is shown to be in violation

3. Violation: Breach of fiduciary Duty – for example, failure to forward a life insurance application to the insurance compay before the affected employee dies.

    • Penalty: The Fiduciary is personally liable for any damages caused to the plan or for any profit realized by the fiduciary through its breach. A breaching fiduciary may also be liable for special fiduciary penalties assessed by the DOL (equal to 20% of the amount recovered by the DOL under a settlement agreement or through an adverse court decision). Such fiduciaries may also be removed from their fiduciary positions and may even be subject to criminal penalties.

Question 8 – Which professionals can help me comply with my ERISA requirements?

  • Benefits Broker/Consultant – Larger firms like mine assist clients with the majority of compliance requirements and offer CPA and ERISA attorney services as a component of our overall advisory services.
  • Payroll Vendor – often provides Section 125 documents, COBRA administration, Employee Handbooks, etc. for a fee.